The opportunity to earn 5% or higher on low-risk certificates of deposit (CDs) seems to be fading, and some individuals may encounter an even quicker end as banks start recalling CDs ahead of their maturity date.

Callable CDs allow financial institutions the option to redeem a CD prior to its maturity. This is more likely to happen when interest rates are decreasing. Banks prefer not to pay higher interest rates when the overall trend is downward.

Following the Federal Reserve’s initiation of a rate-cutting cycle in September, experts predict an increase in the number of recalled CDs in the upcoming months. The Fed reduced its benchmark fed funds rate for the first time in over four years by half a percentage point, moving away from a peak it had sustained for 23 years. Ongoing rate cuts are anticipated through the next year.

“It’s straightforward math,” commented Sean Mason, an investment advisor at Fresno Financial Advisors. “If your CD is earning 5% and interest rates fall, bringing new rates down to 3%, the bank doesn’t want to continue paying the 5%. Additionally, they are lending at lower rates now. Therefore, when interest rates decrease, the chances of your CD being called increase.”

Are all CDs callable?

Not every CD is callable, so it’s essential for savers to review the terms of their CDs, especially those with higher yields. Callable CDs often offer better returns than traditional CDs because they come with the risk of being redeemed early.

“It’s crucial to thoroughly read and understand the fine print of a callable CD,” advised Mary Grace Roske, a spokesperson for the CD rate comparison platform CDValet.com. “Those relying on CDs for reliable income may find themselves caught off guard if their CD is called, cutting short their anticipated earnings.”

Callable CDs usually specify a non-callable period during which they cannot be redeemed. For instance, a five-year CD might have a one-year initial protection period.

They also typically include a call schedule indicating set times when the bank or brokerage can call the CD, often occurring every six months, though the specifics may vary.

What occurs if my CD is called?

If a CD is called, you will receive your original investment along with any accrued interest up to that point.

“However, you forfeit any potential earnings you would have gained had the CD reached its maturity,” Roske noted.

What steps should I take if my CD is called?

Remain calm and begin searching for alternative investment options as soon as possible, experts recommend.

“When your CD is called, it’s important to quickly evaluate other savings options and choose one that aligns with your objectives,” Roske suggested, emphasizing that you don’t want your funds to remain uninvested.

Initially, parking your cash in a money market account could yield interest between 3.5% to 4.5% while scouting for your next investment. However, these rates “won’t last long,” according to Mason, underscoring the need to act swiftly.

Mason recommends considering annuities or Treasuries if you wish to maintain a similar risk profile as CDs.

• Annuities offered by life insurance companies can provide returns comparable to those of the called CD with terms ranging from two, five, ten years, or longer. However, he cautions that larger withdrawals than predetermined terms incur harsher penalties compared to early withdrawal from a CD.

For instance, an annuity may provide a 5% return if you commit for two years. While it might allow yearly withdrawals of some funds, “if you need to access more, a penalty of up to 10% on the excess may apply,” Mason explained, particularly if it’s during the surrender period—the time span during which withdrawals incur fees.

• Treasuries, or nearly risk-free government securities, currently yield between 4% and 5% interest based on their maturity lengths. Investors have the option to hold them until maturity to reclaim their investment while receiving periodic interest payments or to sell them prior to maturity through banks or brokerages, although transaction fees apply and the selling price fluctuates based on market demand. “If your Treasury is yielding 4% and market rates drop to 2%, you may be able to sell it for a higher value than what you originally paid,” Mason remarked.